Tax-avoidance on a ‘brazen’ scale

Caterpillar has a reputation as one of the quintessential all-American companies. We’ve all heard the expression, “How will it play in Peoria?” but in Caterpillar’s case, the equipment manufacturer is literally headquartered in Peoria.

This week, however, the company’s image took a big hit following allegations that Caterpillar relied on an elaborate scheme to avoid paying its tax bill.

Caterpillar, the big American maker of heavy construction and mining equipment, used a subsidiary in Switzerland to avoid paying $2.4 billion of income taxes over 13 years, according to a Senate investigative report released on Monday.

The report said Caterpillar had paid $55 million to its tax consultant and audit firm, PricewaterhouseCoopers, for helping it transfer $8 billion of profits to the Swiss subsidiary from 1999 to 2012. The transfers had no economic substance and were made solely to take advantage of the lower tax rate Caterpillar negotiated with Switzerland, according to Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations.

Levin argued, “It wasn’t a real business transaction. It was a tax deal, pure and simple, to shift profits between related parties.”

Making matters slightly worse, many insiders who helped create the scheme seemed to realize just how ugly their tax-avoidance efforts were. Alec MacGillis, who described the company’s efforts as “astonishingly brazen,” highlighted a 2008 e-mail from a Caterpillar tax consultant who said, “What the heck, we’ll all be retired when this audit comes up on audit.”

How charming. By the time we get caught, the argument goes, it’ll be someone else’s problem.

But politically, that’s not the only interesting part. Rather, what seemed especially amazing was Sen. Rand Paul’s (R-Ky.) defense of Caterpillar.

In fact, during a Senate hearing yesterday, Paul went out of his way to argue that tax-avoidance schemes are a great idea.

Caterpillar got support from Sen. Rand Paul, R-Ky., who questioned why the subcommittee was even holding the hearing.

“I think rather than having an inquisition, we should probably bring Caterpillar here and give them an award,” Paul said. “You know, they’ve been in business for over 100 years. It’s not easy to stay in business.”

Paul said Caterpillar and its accountants have an obligation to shareholders to minimize their taxes. “It is a requirement that you try to minimize your costs. So rather than chastising Caterpillar we should be complimenting them,” Paul said.

If this sounds vaguely familiar, it’s because a year ago, Apple was accused of creating “a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen,” relying on “gimmicks” and “schemes” to sidestep tax laws. At the time, Paul not only endorsed Apple’s tax-avoidance schemes, he also condemned Congress for daring to question the company’s efforts to circumvent international tax burdens. He urged lawmakers to “apologize to Apple” for annoying the company.

Though both Caterpillar and Apple have said they followed the law, it’s worth noting that it’s illegal for corporations to shift profits around simply to lower their tax bill.